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Estimated Tax (Portfolio 581)

Tax Management Portfolio, Estimated Tax, No. 581-3rd, describes in detail the requirements of individuals, corporations, estates, trusts, tax-exempt organizations, and private foundations for paying estimated tax.

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DESCRIPTION

Tax Management Portfolio, Estimated Tax, No. 581-3rd, describes in detail the requirements of individuals, corporations, estates, trusts, tax-exempt organizations, and private foundations for paying estimated tax.

Taxpayers are generally required to pay their income tax liability in installments in the form of estimated tax payments as they earn income. If a taxpayer fails to make the minimum required payment of any installment of estimated tax, an addition to tax is imposed. However, no addition to tax is imposed if the taxpayer meets one of the statutory exceptions.

Different rules apply to individuals and corporations (including S corporations with respect to certain corporate-level taxes). Trusts and estates (including the grantor trust of a decedent which receives the residue of the probate estate) with respect to tax years more than two years after the decedent's death must compute their estimated tax in the same manner as an individual, while tax-exempt organizations and private foundations (whether organized as a corporation or a trust) are generally treated as corporations for this purpose.

In addition, certain partnerships and S corporations that elect a tax year other than the required tax year must make certain “required payments.” These payments are intended to deposit with the IRS an amount equal to the benefit of the tax deferral obtained by the partners and shareholders from owning an interest in a fiscal year pass-through entity. These required payments are in addition to any estimated tax payments required to be made by the partners or shareholders.

Partnerships with foreign partners must also withhold and remit to the IRS in a manner similar to estimated tax payments a portion of the foreign partner's distributive share of partnership income that is effectively connected with a U.S. trade or business. This Portfolio discusses the applicable Code sections and analyzes (1) the requirements to pay estimated tax; (2) the amount and timing of each required installment payment; (3) the penalties for not making timely payments of estimated tax; (4) the exceptions to these requirements; (5) the required payments for certain partnerships and S corporations that use a fiscal year; and (6) the amounts required to be withheld and paid over by partnerships with foreign partners.


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AUTHORS

ALAN J. TARR
Alan J. Tarr, B.S., Brown University (1975); J.D., Vanderbilt University School of Law (1979); M.B.A., Vanderbilt University Graduate School of Management (1979); LL.M. (Taxation), New York University School of Law (1982); member, New York Bar, New York State Bar Association (Tax Section; Executive Committee (1995–2004); former co-chair, various committees); American Bar Association (Tax Section; vice-chair, Real Property, Probate and Trusts Committee on Federal Taxation of Real Property (2004–2007); and New York City Bar Association (Tax Section; Committee on Taxation of Business Entities (2007– ); Chair (2008–2011)); member, Tax Management Advisory Board; author, “Estimated Tax,” “Formation of a Corporation,” “Capitalization of a Corporation,” “Multiple Corporations,” and “Stapled Entities” for Tax Practice Series; co-author, former 59 T.M., Corporate Liquidations: Planning and 634 T.M., Civil Tax Penalties; contributor, various journals.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Individuals

A. Requirement to Pay Estimated Tax

1. Estimated Tax

2. Who Must Pay Estimated Tax

3. Definition of Tax

4. Due Dates

a. In General

b. Nonresident Aliens

c. January Return as Payment

d. Saturdays, Sundays and Holidays

e. Service in Combat Zone or Contingency Operation

f. Presidentially Declared Disaster or Terroristic or Military Action

g. Y2K-Related Failures

h. Extension of Time to Pay Estimated Tax

5. Amount of Estimated Tax Installments

a. General

b. Alternative 1 - Tax Shown on Current Year's Return

c. Alternative 2 - Tax Shown on Prior Year's Return

d. Alternative 3 - Tax on Annualized Income

e. Married Taxpayers

B. Special Rules for Computing Required Installment Amount and Due Dates

1. Alternative 1 - Recomputed Tax

2. Alternative 2 - Changes Between Separate and Joint Returns

a. Joint Return to Separate Returns

b. Separate Returns to Joint Return

3. Alternative 3 - Income for Installment Period

a. General

b. Members of Partnerships

c. Beneficiaries of Estates and Trusts

d. Shareholders of S Corporations

e. Treatment of Subpart F and § 936 Income

4. Farmers and Fishermen

5. Deceased Taxpayers

6. Short Taxable Year

a. General

b. Due Dates

c. Applicable Percentage

d. Alternative 2 Adjustments

e. Alternative 1 and Alternative 3 Amounts

7. 52-53 Week Taxable Year

8. Employers of Domestic Workers

9. Election to Pay Additional 1993 Tax Liability in Installments

10. Alternative 2 - Additional Limitations During 1992-1993

a. Taxpayers Subject to the Limitation

b. Effect on Amount

C. Payment of Estimated Tax

1. General

a. Credit Against Liability

b. Payment Vouchers

c. Form of Payment

d. Remittance with Form 4868

2. Advance Payment of Installment

3. Treatment of Income Taxes Withheld

4. Where to Pay Estimated Tax

5. Timely Payment of Installments

a. Physical Payments

b. Electronic and Credit Card Payments

6. Use of Overpayment of Prior Year's Income Tax

7. Allocation of Estimated Tax Between Spouses

a. General

b. Relief from Liability

8. No Refund of Overpayments of Estimated Tax

D. Penalty for Underpayment of Estimated Tax

1. Addition to Tax

a. In General

b. Penalty Study Recommendations

2. Amount of Underpayment

3. Period of Underpayment

4. Underpayment Rate

5. Assessment of Penalty

6. Burden of Proof

7. Coordination with Other Penalties

E. Exceptions to Penalty for Underpayment of Estimated Tax

1. No General Reasonable Cause Exception

2. Small Amount of Tax

3. No Tax Liability for Preceding Year

4. Waiver in Certain Cases

a. General

b. Against Equity and Good Conscience

(1) General Rule

(2) Tax Law Changes

(3) Natural Disasters and Other Extraordinary Events

(4) Settlement Initiatives

(5) Required Change in Method of Accounting

(6) Deceased Individuals

(7) Citizens and Residents Abroad Before 1988

(8) JCT and Treasury Study Recommendations

c. Retired and Disabled Individuals

5. January Return

6. Bankruptcy Under Title 11

F. Criminal Penalty for Willful Failure to Pay Estimated Tax

G. Miscellaneous

1. Change of Taxpayer's Name or Address and Divorced Taxpayers

2. Assessment of Estimated Tax

3. Statute of Limitations and Interest on Overpayments

III. Trusts and Estates

A. Requirement to Pay Estimated Tax

B. Treatment as an Individual

1. General

2. Amount of Installments

3. Due Dates

4. Multiple Trusts, Separate Shares and Electing Small Business Trusts

C. Computing Annualized Income

1. General

2. Distribution Deduction

3. Participant in Common Trust Fund

D. Short Taxable Year

1. Due Dates

2. Required Installment Under Alternative 2

3. Applicable Percentages

4. Personal Exemption

E. Payments of Estimated Tax

1. Filing

a. General

b. Federal Tax Deposit System

c. Electronic Funds Transfer

2. Election to Treat Payment as Made by Beneficiary

F. Penalties for Underpayment of Estimated Tax and Failure to Deposit

G. Exceptions to the Penalty

1. Small Amount of Tax

2. No Tax Liability for the Preceding Year

3. Waiver of Penalty

IV. Corporations

A. Requirement to Pay Estimated Tax

1. Definition of Estimated Tax

2. Tax

a. General

b. Excluded Taxes

c. Treatment of Investment Tax Credit Recapture and Similar Items

3. Corporations Required to Pay Estimated Tax

a. General

b. Affiliated Groups

c. Foreign Corporations

d. S Corporations

e. Bankrupt Corporations

f. Certain Funds

g. Classes of Corporations Not Required to Make Estimated Tax Payments

4. Due Dates

a. In General

b. Special Rules for Certain Installments

c. Saturdays, Sundays and Holidays

d. Extension of Time

5. Amount

a. General

b. Alternative 1 - Tax on Current Year's Return

c. Alternative 2 - Tax on Prior Year's Return

d. Alternative 3 - Tax on Annualized Income

e. Alternative 4 - Tax on Adjusted Seasonal Income

6. Declaration Not Required

B. Special Rules for Computing Required Installment Amounts and Due Dates

1. Determination of Taxable Income

a. Taxable Years Beginning on or After September 6, 2007

(1) General Rule

(2) Special Rule for Items Routinely Incurred on an Annual Basis

(3) Advance Payments

(4) Extraordinary Items

(5) Credits

(6) Depreciation and Amortization

(7) Distributive Share from Pass-Through Entities

(8) Alternative Minimum Tax

(9) Change in Accounting Method

b. Taxable Years Beginning Before September 6, 2007

(1) General

(2) Use of Reasonable Estimates

(3) Credits

(4) Treatment of Subpart F and § 936 Income

(5) Real Estate Investment Trust Dividends

c. 2005 Proposed Regulations

(1) General

(2) Recurring Items

(3) Carryovers

(4) Change in Accounting Method

(5) Depreciation

(6) Partners

(7) Use of Reasonable Estimates

2. Large Corporations

3. S Corporations

4. Insurance Companies and Banks

a. Foreign Insurance Companies

b. Special Estimated Tax Payments

c. Mutual Life Insurance Companies

d. Banks

5. Short Taxable Year

a. General

b. Current Year Is Short Taxable Year

(1) Short Year of Less Than Four Months

(2) Taxable Years Beginning After September 6, 2007

(3) Taxable Years Beginning Before September 6, 2007

c. Prior Year Is Short Taxable Year

6. 52-53 Week Taxable Year

a. In General

b. Taxable Years Beginning After September 6, 2007

c. Taxable Years Beginning Before September 6, 2007

C. Payment of Estimated Tax

1. Credit Against Tax Liability

2. Manner of Payment

a. Federal Tax Deposit Coupons

b. Electronic Funds Transfer

3. Timely Mailing of Tax Deposits

4. Advance Payment of Installment

5. Use of Prior Year's Overpayment

D. Penalty for Underpayment of Estimated Tax

1. General

2. Amount of Underpayment

3. Period of Underpayment

4. Underpayment Rate

5. Assessment of Penalty

6. Burden of Proof

7. Partnership Withholding Tax with Respect to Foreign Partners

a. Partnership Years Beginning After May 18, 2005

(1) General

(2) Foreign Partner

(3) Computation of § 1446 Tax

(a) Effectively Connected Taxable Income

(b) Applicable Rate

(c) Other Taxes and Credits

(4) Installment Payments

(5) Coordination with Other Withholding

(6) Reporting the § 1446 Tax

(7) Treatment of Foreign Partner

(8) Special Rules Regarding Partner Deductions and Losses

(9) Effective Date

b. Partnership Years Beginning Before May 19, 2005

E. Exceptions to Penalty for Underpayment of Estimated Tax

1. No Reasonable Cause Exception

2. Small Amount of Tax

3. Bankruptcy Under Title 11

4. Waivers

F. Adjustment of Overpayment of Estimated Tax

1. In General

2. Application Form 4466

3. Application Subject to Limited Examination

4. Claim for Credit or Refund

5. Effect of Adjustment

G. Penalty for Excessive Adjustments Under § 6425

1. In General

2. Excessive Amount

3. Coordination with § 6655(a) Penalty

H. Penalty for Failure to Make Deposits - § 6656

1. Failure to Make Deposits

2. Reasonable Cause Exception

3. Temporary Waiver for Failure to Pay by Electronic Funds Transfer

4. Coordination of § 6656(a) and § 6655(a) Penalties

5. Burden of Proof

I. Affiliated Groups of Corporations

1. Payment of Estimated Tax

2. Penalty for Underpayment of Estimated Tax

a. General

b. Computation of Penalty on Consolidated Basis

c. Computation of Penalty on Separate Member Basis

d. Consolidated Payments and Separate Returns

e. Large Corporations

3. Adjustment of Overpayment of Estimated Tax

4. Reverse Acquisition

J. Criminal Penalties

1. Penalty for Willful Failure to Pay Estimated Tax

2. Penalties for False or Fraudulent Statements

K. Miscellaneous

1. Assessment of Estimated Tax

2. Statute of Limitations and Interest on Overpayments

3. Effect of Estimated Tax on Earnings and Profits

V. Tax-Exempt Organizations and Private Foundations

A. Requirement to Pay Estimated Tax

B. Amounts and Due Dates

C. Payment of Estimated Tax

1. Federal Tax Deposit Coupons

2. Electronic Funds Transfer

D. Penalty for Underpayment of Estimated Tax

E. Exceptions to the Penalty

VI. Required Payments by Fiscal Year Entities

A. Background

B. Election of Taxable Year

1. Required Year

2. Election of a Different Taxable Year

3. Making the Election

C. Required Payments

1. Amount

a. General

b. Adjusted Highest § 1 Rate

c. Net Base Year Income

d. Phase-In

e. Exception if Less Than $500

2. Due Date

3. Reporting Requirements

4. Interest and Penalties

5. Refunds

D. Comparison Between Retention and Conversion

VII. Constitutionality of Estimated Tax


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Deficit Reduction Act of 1984 (P.L. 98-369) § § 411-414; Conference Report, H.R. Rep. No. 861, 98th Cong., 2d Sess. (1984) (Excerpt)

Worksheet 2 Tax Reform Act of 1986 (P.L. 99-514) § § 1404, 1541–1543, 1879(a); Conference Report, H.R. Rep. No. 841, 99th Cong., 2d Sess. (1986) (Excerpts); General Explanation of the Revenue Provisions of the Tax Reform Act of 1986, Prepared by the Staff of the Joint Committee on Taxation (1987) (Excerpts)

Worksheet 3 Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) § 10301(a); Conference Report, H.R. Rep. No. 495, 100th Cong., 1st Sess. (1987) (Excerpts)

Worksheet 4 Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) § § 1014(d)(2), 2004(r), 4005(g)(5), and 4005(h)(3); H.R. Rep. No. 795, 100th Cong., 2d Sess. (1988) (Excerpts); S. Rep. No. 445, 100th Cong., 2d Sess. (1988) (Excerpts); Conference Report, H.R. Rep. No. 1104, 100th Cong., 2d Sess. (1988) (Excerpts)

Worksheet 5 Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239); The Tax Extension Act of 1991 (P.L. 101-227); The Emergency Unemployment Compensation Act of 1991 (P.L. 102-164); The Emergency Unemployment Compensation Act of 1992 (P.L. 102-244); Unemployment Compensation Amendments of 1992 (P.L. 102-318) (Excerpts)

Worksheet 6 Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) § 13214 - Ways and Means Committee Report and Act Language; Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) § 13225 - Ways and Means Committee Report and Act Language

Worksheet 7 Excerpt from IRS Publication 17, Your Federal Income Tax Estimated Tax

Worksheet 8 Excerpts From Publication 505 - Tax Withholding and Estimated Tax

Worksheet 9 Excerpt From Publication 538 - Accounting Periods and Methods

Worksheet 10 Excerpt From Publication 542 - Corporations

Worksheet 11 Excerpts from Instructions for Form 1120S, S Corporation Income Tax Return

Worksheet 12 Fact Pattern for Form 1120-W Corporation Estimated Tax Worksheet and Completed Form 1120-W

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Legislative History:

Treasury Notices and Rulings:

Cases:

UNOFFICIAL

Periodicals:

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1984

1986

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1989

1992

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2005

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